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Interest Rates, Time Value, Investments, IRR, NPV and Leases

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#1: Comparing Interest Rates

#3: Applying the Time Value

#4: Investment Criteria

#5: IRR & NPV

#6: Buy vs. Lease

#7: WACC Components - Quiz #1,2, 4, & 5
Part A
Part B
Part C
Part D

#8: Calculating WACC

Bonus: Percent of Sales Method - Brealey


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#1: Comparing Interest Rates

To get the better deal we will have to calculate the effective interest rate. The effective interest rate is given as (1+APR%/a)^a-1 where a is the compounding frequency
For 8.6% compounded semi annually the compounding frequency is 2, the effective interest rate is (1+8.6%/2)^2-1 = 8.78%
For 8.4% compounded monthly the compounding frequency is 12 and the effective interest rate is (1+8.4%/12)^12-1 = 8.73%
Since the effective rate for monthly compounding is lower, it is a better deal.

#2: Applying the Time Value

a. If the interest rate is 8%, what is the present value of the sales price?

The present value of the sales price is given as 4,000,000/(1.08)^5 = 2,722,333

b. Is the property investment attractive to you? Why or why not?

The property is not attractive since the present value is less than the purchase price. This implies that the return is lower than 8%

c. Would your answer to (b) change if you also could earn $200,000 per year rent on the property?

We find the present value of the rent. This is an annuity and so we use the PVIFA table to get the PV factor. For 5 years and 8% the factor is 3.993. The PV of rent income is 200,000X3.993=798,600. The total PV is 2,722,333+798,600=3,520,933
The answer will change since the PV is now higher than the purchase price and so the investment is attractive.

#3: Applying the Time Value

a. Is this a good deal if the discount rate is 6%?

To make the decision, we need to find the present value of the investment. The present value is 2,000/(1.06)^10 = 1,117. Since this is higher than the investment amount of $1,000 ...

Solution Summary

The solution has various finance questions relating to Comparing Interest Rates, Applying the Time Value, Investment criteria - IRR & NPV, Buy vs. Lease, WACC and percentage of sales method